Markets rise as US strikes deal to avert debt crisis

House Speaker, and most senior Republican, John Boehner said his party would approve the Senate deal, but vowed to continue campaigning to repeal "the train wreck that is the President's health care law", known as "Obamacare".Photo: REUTERS/Jonathan Ernst

Markets rose sharply as President Barack Obama and Republicans agreed to reopen the US government and, crucially, increase the country’s $16.7 trillion (£10.5 trillion) borrowing limit, with just hours to go before a final deadline.

The eleventh-hour deal came as companies on both sides of the Atlantic made contingency plans in case lawmakers in Washington had failed to reach an agreement, which could have thrown the global economy back into recession.

In the US, banks have secretly been stockpiling extra funds in cash machines in anticipation of a sudden mass panic and were considering extending free credit to customers who usually depend on social security payments.

Bank of New York Mellon said its balance sheet had swelled by around $10bn since the US government shut down at the start of the month, as customers liquidated their assets and moved into cash ahead of a potential US default.

UK regulators had been in “daily contact” with British banks to ensure they were as prepared as they could be if a deal had not been reached.Those involved said that it was like preparing for a “phoney war” because few actually believed America was heading for another economic disaster on the same sort of scale as the Lehman Brothers collapse in 2008.

Speaking ahead of a final round of voting on the proposed deal, White House press secretary Jay Carney said that the American economy, the world’s largest, had “already paid a price” for coming so close to a default on its debt. John Boehner, the Republican House Speaker, confirmed that Congressional Republicans would back the agreement but vowed to continue the fight to stop Democrat healthcare reforms, known as “Obamacare”, which he described as a “train wreck”.

The political stand-off, which has shut the US government down for 16 days, has sucked $24bn out of the US economy, equivalent to 0.6 of a percentage point off America’s gross domestic product for the fourth quarter, according to Standard & Poor’s. It could continue to have an adverse effect, the ratings agency added. “If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their cheque books. That points to another Humbug holiday season.”

Warren Buffett, the US billionaire investor who is known as the “Sage of Omaha”, cautioned that failure to reach a deal would have caused severe damage to America’s economic standing.

“We’ve been building a reputation for proper fiscal behaviour for 237 years [and] have become the reserve currency of the world,” he told CNBC. “To give up or to do anything that damages a 237-year period of good behavior is idiocy.”

Rating agency Fitch has said that it could strip the country of its prized AAA status, even if it does not default on its debt.

US markets jumped sharply as the Senate announced it had reached a deal. The Dow Jones closed up more than 200 points, at 15,373.83, while the broader S&P 500 rose 23.5 points to 1,721.54. The dollar climbed against the euro and the yen.

A formal vote was due to take place “after dinner” in Washington, according to a Republican aide.